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Government of Money
In Yelbatin a long time ago, everyone wanted gold, and everyone was willing to accept gold in exchange for goods and services. Some gold was held in private hands, but most was deposited in an enormous vault controlled by the government, which issued gold notes that were used as currency. A gold note was simply a piece of paper saying that the bearer owned a certain amount of gold. The Vault of Yelbatin was not a bank. It did not make loans. It was simply a publicly owned and highly secure storehouse for gold. Private banks did exist and did make loans. But they only held gold notes issued by the government. Bank notes were issued by these private banks and were also used as currency. These bank notes entitled the bearer to get gold notes from the bank, which, in turn, entitled the bearer to withdraw gold from the Vault. Banks made loans charging interest by issuing additional bank notes. Eventually paper gold notes were replaced, one for one, with digital notes. Banks continued to issue paper, along with their own digital notes, but the government went entirely digital as a cost-saving measure. The gold notes software was open source, enhanced and protected by the community of users, monitored by the government. Then the government announced that the Vault of Yelbatin had reached its capacity and would not be enlarged. No new gold deposits would be accepted; no new gold notes would ever be issued by the government. The Vault of Yelbatin would continue to protect the gold already deposited there, and notes already issued would be honored. But private owners of gold not deposited at the Vault would have to continue to secure it themselves, depositing it in private banks if they wished. The calamity Then one day, a great sinkhole opened up and the Vault sank far into the earth, down to a great subterranean sea of molten lava, far below Yelbatin. The gold was melted, mixed and dispersed among worthless substances. At first, citizens of Yelbatin were in a panic. Were their bank and gold notes now worthless? Fearing ruin they rushed out to unload their notes, hoping to buy gold and silver and other commodities from private sources. But who in his right mind would trade real gold or silver for what were now worthless notes? Then the government made a calming announcement. There is no need for alarm, the government declared; the gold is still here, in exactly the same quantity as before, and still belongs to the holders of the government-issued gold notes. It is just in a different physical form. It is true that nobody can get at it, but what difference does that make? In the Vault, for many years, the gold wasn't ever doing anything but sitting and collecting dust. So what has changed? It still sits as it sat before, only now secured in molten rock instead of an iron vault. The value of the vaulted gold was only as money in the form of gold notes, and the gold notes never melted! They will always circulate in the exact same quantity as before. Some citizens were not calmed. Gold has intrinsic value, these skeptics insisted, and the digital notes do not, so whatever the government might "announce," and whatever anybody thinks, those digital notes are now truly worth nothing. The skeptics unloaded their notes to others, and refused to accept the notes held by others in exchange for goods and services. That did not last very long. Others now accepted their notes, selling privately stored gold and other commodities to the skeptics at what were now very high prices. And skeptical store owners who declared "We do not take notes that are not backed by accessible gold" lost all of their customers and quickly went out of business. Nobody had any such notes to give them! The rest of the economy hummed along just fine. and soon, even the skeptics changed their minds and decided to accept gold notes once again. They had no choice. The beginning of money The gold of Yelbatin was money because everybody wanted gold. But everybody wanted gold not because it had intrinsic value but simply because it was money. In other words, they wanted gold because they could buy things with gold, not because they could adorn things or build things with gold. Let's look at this another way. The story above began, you will recall, when, in Yelbatin, a long time ago, "everybody wanted gold." But let's think about a time long, long before that, in the age of strictly barter trade, when there was no money at all. Gold then was not something that everybody wanted. Some people did want it. Craftsmen, for example, wanted it so they could make things for barter trade with people who wanted things that were made out of gold. These particular people, the craftsmen and some of their customers — not everybody — wanted the gold for its intrinsic value and not because it was money. There was no such thing as money. Then one day, a shoemaker's neighbor brought gold to a farmer who did not want gold, and said to him, "I will give you this gold in exchange for your product. I know you don't want gold, but you do want tools built by craftsmen, don't you? Craftsmen will take this gold from you in exchange for the tools you want. They will take it because they want gold." The farmer took the gold. He took it, not for its intrinsic value to himself, but only because he knew he could buy something with it, something he did want. However, he knew he could buy something with it only because it did have intrinsic value, to someone else, to someone who had what the farmer wanted. That was not quite yet the beginning of money. But the next week, the shoemaker who had learned from his neighbor that the farmer had accepted gold brought some gold to the farmer and tried to strike the same deal. "Sorry," said the farmer. "I needed tools from craftsmen last week, but I've bought them and now I have all the tools I need. What else do you have for trading?" The person had plenty of shoes, but had none with him that day. He had nothing else to to offer right then and there besides gold. So he replied, "Listen, you may not want the craftsmen's tools right now, but you will someday, and surely somebody else does want tools, doesn't he? That person will take this gold from you in exchange for something that you do want. He will take it for the same reason that you took it last week. So can't we still do a trade right now?" "Well," said the farmer, "I don't know when I'll need tools again, and I don't know if I'll ever find someone who wants tools and has what I want." "Not a problem," replied the shoemaker. "This gold will never lose its value. You can hold it as a store of value, and someday somebody will accept it when you need something. They'll accept it in trade for the same reason you do. They know, as you do, that it has value. In fact, I'm so sure of this that I, myself, will accept it. So keep the gold. If you never need more tools and never find occasion to trade with anyone who does need tools, well, you'll still need shoes someday, right? You can just bring the gold to my shop and I'll accept it in exchange for shoes." "Is that a promise?" asked the farmer. "Indeed," said the shoemaker. "In fact, I'll accept gold for shoes from anyone, not just from you. So if you don't find someone who wants a craftsman's tools, you can trade the gold to someone who wants shoes and — you have my word on it — they can bring it to my shop just as you would have done. You can tell them this when you offer the gold." The farmer thought about this for while. He had done credit trade many times in the past, where he gave produce to someone on the promise of barter payment in the future. But that was only with close friends, and, still, there were occasions when the friend was unable to fulfill the promise. However, although he did not know this shoemaker very well, he did know that the shoemaker had a reputation to protect, and, in any case, what the shoemaker was offering him now was considerably better than a mere promise. Even if the shoemaker never delivered on the shoes, the farmer would still have the gold, a thing of intrinsic value to craftsmen and their customers. So the farmer accepted the gold as payment. The next day the farmer took gold to a tailor with whom he'd done barter trade many times, and offered it in payment for clothes. The farmer told the tailor about his experience with the shoemaker and the shoemaker's neighbor, and how he'd accepted gold from them for produce. The tailor smiled and said, "Well, I've never met this shoemaker, and I don't need any shoes or any tools, and I don't know if I'll run into someone who does, but I do like your produce very much. Are you making the same promise to me that the shoemaker made to you? If I bring gold to you, will you accept it from me as you accepted it from him?" "Of course!" replied the farmer, as he gave gold to the tailor. The tailor, in turn, used gold to buy cabinets from a carpenter. Word spread quickly about how gold could be used as a medium of exchange. Soon everyone in Yelbatin was doing what the shoemaker and farmer and tailor and carpenter had done. And that was beginning of money. The value of money Even craftsmen, who once had valued gold for only what they could make with it, now valued it also for what they could buy with it. Gold took on a value that was far greater than the value of things that were made and adorned with gold. It now represented the value of produce and cabinets and clothes and shoes and everything else, because everyone in Yelbatin who offered gold in exchange for goods and services was, in effect, pledging, to everyone, his own willingness to accept gold in exchange for his own goods or services. The extra value of gold was "backed up," not by its intrinsic value to craftsmen, which was very small, but instead by this expectation of its acceptance by others as a medium of exchange, this "promise" that had become implicit. And what, then, was the actual value of gold?